Introduction
Banks, the word itself invokes a person to think of money or imagine a financial institution working to support the economy. There are various ways a bank can help in working of an economy; the most common way every person is familiar with the way commercial banks function is by opening accounts for individuals, allowing them to make deposits, providing small businesses with loans and earning interests on the loan as well as the deposits. They mainly work for the common people and businesses, but their full-scale work is not based on giving services to new startups or large Firms, unlike investment banking. Let’s see to this in detail.
Investment Banking vs. Commercial Banking
Investment Bank is a financial service provider that works for large corporations, providing them with services for a startup it helps during Its first Initial Public Offering (IPO). Along with this, it acts as a broker, helps in Mergers and acquisitions and helps smooth the going of complex transactions; it may even act as a financial adviser to large corporations.
Commercial Bank, on the other hand, deals with the usual common banking service enjoyed by the common people and small businesses; these banks accept deposits from people and give out loans to Businesses. They safeguard the assets of the general public and have a diverse client base than investment banks.
Differences Between Investment Banks and Commercial Banks in Tabular Form
| Parameters | Investment Banking | Commercial Banking |
| Client Base | Loans ( mortgage, personal, Student ), Deposits from large and small businesses, along with personal deposits. | Make profits through interests deposits and loans along with fixed fees on services. |
| Earnings | Earns Commissions on services and fixed fees | Make profits through interest deposits and loans along with fixed fees on services. |
| Primary Services Provided | Providing assistance to financial corporations and companies | Loans ( mortgage, personal, Student ), Deposits from large and small businesses along with personal deposits. |
| Secondary services provided | Brokerage, Advisory services | Mobile banking services, net banking services, credit cards, etc. |
| Employee salaries and working scope | High-paying jobs with more tense and long hours of work | Less work pressure 9 to 5 work jobs usually, but lower paying jobs than Investment banking jobs. |
What is Investment Banking?
Investment banking involves a variety of tasks; they work to help raise investments for the client and ensure the successful completion of complex transactions, and also help in smooth Mergers and acquisitions (M&As). They act as brokers and middlemen for all these transactions and services as these take place on a large scale. They make profits through commissions or decided fees.
Some of the popular and famous investment banks are JP Morgan Chase, Morgan Stanley, Citi Group, Goldsachs, etc.
Types of Investment Banks
There are four common types of investment banks
- Elite boutique banks - these offer services a small number of services like asset management, Mergers and acquisitions, etc. These are small in size, working to handle big transactions.
- Regional boutique banks - The name itself suggests that these investment banks specialise in Niche services like mergers and acquisitions and personal investment management.
- Bulge bracket investment banks - These are the largest investment banks, for example, Deutsche Bank and Morgan Stanley. These provide all the investment bank services there are to be provided and usually work for only the big clients and nobody below $500 million in assets, but they do offer a few services to other clients.
- Middle-market investment banks - these offer all investment banking services like bulge banks but at a smaller scale; also, they don’t look for clients with minimum assets of $500 million. The minimum cap for these banks is usually $5 million.
Functions of Investment Banks
- Raising money for clients in case needed, they do this by trading tradable assets like bonds or stocks or by the sale of debt.
- Providing advice and consultancy regarding investment management to clients.
- Providing services to facilitate IPO for start-ups or for companies wanting to become publicly traded by either buying their initial stock or by monitoring the entire process.
- Analysing the risk of Investment and informing the client or the bank whether the decision would be favourable or not.
- Assisting in Mergers and acquisitions of different companies to ensure a smooth transfer.
Benefits of Investment Banks
- Make things easier and help save a lot of money by providing their experienced insights and helping big businesses and firms save time.
- They offer well-researched data and then provide advice related to different investment choices, helping the companies make confident decisions.
- They provide their expertise in services like financial management of different projects.
- They help in the smooth going of complex transactions by acting as a mediator.
- They help in smooth handover when acquisitions or mergers take place, leaving no room for further issues as they take care of all aspects.
What is Commercial Banking?
Commercial Banking refers to services provided by commercial banks, such as accounting services.
They accept different types of deposits like current, savings, etc. Along with this, they provide services like loan different types of loans - education loans, personal loans, mortgages, short-term loans, etc.
They also provide different transaction facilities like mobile payment net banking, etc. They make the movement of money in the economy smooth with services like debit and credit cards. Their clients range from the general public to small and big business owners. These banks make profits through interest and fees charged on services provided.
Types of Commercial Banks
- Private sector banks - these are banks with large stakes of private players or stakeholders. They focus on fast and better services to compete with other private commercial banks, and the customer base ranges from common public account holders to small and medium-sized businesses.
- Public sector banks - The major shareholder in these banks is the government. These acts provide the same services as the private escort banks, but unlike the private sector banks, they provide services at affordable rates as the main motive is to cater for the needs of the masses.
- Foreign Banks - These banks have branches in foreign countries with headquarters in the home country. These banks provide similar facilities to public and private sector banks, but along with it, they trade in foreign securities and provide their services internationally along with facilitating foreign exchange services.
Functions of Commercial Banks
- Accepting all kinds of deposits from customers like saving, current, fixed and demand.
- Providing cash credit along with all kinds of loans, auto loans, Gold loans, mortgages, education loans, etc.
- They offer a locker facility
- Allow fund transfers through them to other commercial banks.
- Provide facilities like debit cards, net banking, etc.
- Providing overdraft facility to current account holders.
Benefits of Commercial banks
- Help small businesses by providing short-term and long-term loans.
- They follow the instructions of commercial banks and aid in the successful implementation of monetary policy, also helping in controlling inflation.
- Support the agriculture sector by providing various advance loans to the farmers.
- Aid international transactions by serving as agents for international transactions.
- They help individual consumers enjoy the benefit of smooth and fast-paced banking services like loans and net banking and also allow them to utilise their savings better.
Key Differences between Investment and Commercial Banking In Points
1. The difference in Types of clients
One of the key differences between Investment banking and commercial banking is the clients that they deal with. The clients for investment banks are large firms, big Businesses, or institutional Investors.
On the other hand, commercial banks deal with the general public and small businesses catering to the needs of individual consumers; Though both client bases are starkly different, they are equally important for the proper functioning of an economy.
2. Difference in earnings and ways of earnings
Commercial banks earn by earning interest on deposits made by consumers and businesses, along with the interest on loans issued by them. Additionally, the fees in return for the service provided by them.
The investment banks earn on the services they provide, like risk assessment or ensuring smooth transactions. They make a commission in case they are helping a company issue stocks in an IPO. The earnings made by investment banks are naturally quite banks.
3. The Difference in Services Provided
As we have discussed previously, there is a huge difference in the services provided by the investment and commercial banks; where investment banks provide services for mergers and Acquisitions and IPO-related services, the commercial banks focus on the needs of individual consumers and small businesses providing them loans, etc.
4. The difference in regulations followed
The investment banks working for big businesses have to look for regulations related to such services and what national and international laws may be violated due to these services. As they work for huge businesses, the need to keep track of international law is very important for them. Commercial banks, too, need to keep track of international and national regulations, but as they cater to the needs of individual consumers and small businesses, they will probably be looking at the regulations regarding minimum account balance and repo rates along with foreign transaction regulations, etc., unlike the investment bank.
Conclusion
Commercial banks and Investment banks are both equally important in today’s fast-paced world for faster quicker working and smooth growth of economies, though some view commercial banks as more important due to their nature of catering to consumers and small businesses that act as the backbone of the economy that doesn’t make Investment Banks any less important after all a nation cannot survive without big Businesses either without small business and consumers.
